SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from. . . . . . . .to. . . . . . . . . . . . . . . . .
Commission file number 333-89725
AES Eastern Energy, L.P.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Exact name of registrant as specified in its charter)
Delaware 54-1920088
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 N. 19th Street, Arlington, Va. 22209
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (703) 522-1315
N/A
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Registrant is a wholly owned subsidiary of The AES Corporation. Registrant meets
the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and
is filing this Quarterly Report on Form 10-Q with the reduced disclosure format
authorized by General Instruction H.
TABLE OF CONTENTS
PART I
Page
Item 1. Condensed Consolidated Financial Statements (Unaudited).......... 3
AES EASTERN ENERGY, L.P.
Condensed Consolidated Financial Statements:
Consolidated Statements of Income for the three months ended
March 31, 2001 and March 31, 2000
Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000
Consolidated Statements of Cash Flows for the three months ended
March 31, 2001 and March 31, 2000
Statement of Changes in Partners' Capital for the three months ended
March 31, 2001
Notes to Condensed Consolidated Financial Statements
AES NY, L.L.C. (General Partner of AES Eastern Energy, L.P.)*
Condensed Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 2001 and
December 31, 2000
Notes to Condensed Consolidated Balance Sheets
* The condensed consolidated balance sheets of AES NY, L.L.C.
contained in this Quarterly Report on Form 10-Q should be
considered only in connection with its status as the general
partner of AES Eastern Energy, L.P.
Item 2. Discussion and Analysis of Results of Operations and
Financial Condition
(a) Results of Operations...................................... 14
(b) Liquidity and Capital Resources............................ 14
PART II
Item 1. Legal Proceedings............................................... 16
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits................................................... 16
(b) Reports on Form 8-K........................................ 16
Signature................................................................ 17
2
PART 1 - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
AES Eastern Energy, L.P.
Condensed Consolidated Statements of Income
Three months ended March 31, 2001 2000
---- ----
(Thousands)
Operating Revenues
Energy $94,087 $72,050
Capacity 7,736 7,847
Transmission congestion contract 6,896 -
Other 2,686 199
--------- --------
Total operating revenues 111,405 80,096
Operating Expenses
Fuel 36,024 29,317
Operations and maintenance 3,492 2,112
General and administrative 14,390 13,708
Depreciation and amortization 8,108 7,776
--------- --------
Total Operating Expenses 62,014 52,913
--------- --------
Operating Income 49,391 27,183
Other Income/(Expense)
Interest expense (14,956) (15,433)
Interest income 951 365
Gain on derivative valuation 69 -
-------- --------
Net Income $35,455 $12,115
========= ========
The notes are an integral part of the condensed consolidated financial
statements.
3
Item 1. Condensed Consolidated Financial Statements (Unaudited) (Cont'd)
AES Eastern Energy, L.P.
Condensed Consolidated Balance Sheets
March 31, Dec. 31,
2001 2000
------- -------
ASSETS (Thousands)
Current Assets
Restricted cash:
Operating- cash and cash equivalents $ 3,745 $ 9,924
Revenue Account 67,100 73,141
Accounts receivable - trade 30,507 33,799
Accounts receivable - affiliates 1,017 571
Accounts receivable - other 1,608 2,170
Inventory 22,692 23,308
Prepaid expenses 8,539 6,152
---------- ----------
Total Current Assets 135,208 149,065
Property, Plant, Equipment and Related Assets
Land 6,884 6,877
Electric generation assets (net of accumulated
depreciation of $43,239 and $36,749) 736,682 740,909
Other intangible assets (net of accumulated
amortization of $13,891 and $12,273) 231,541 232,480
---------- ----------
Total property, plant, equipment and
related Assets 975,107 980,266
Other Assets
Derivative valuation 1,257 -
Transmission congestion contract 31,249 24,851
Rent reserve account 31,242 30,978
---------- ----------
Total Assets $1,174,063 $1,185,160
========== ==========
LIABILITIES
Current Liabilities
Accounts payable $1,610 $ 1,432
Lease financing - current 4,596 1,813
Enviromental remediation 1,000 1,000
Accrued interest expense 16,366 29,472
Due to The AES Corporation 9,688 8,604
Other accrued expenses 15,685 17,524
Other liabilities and accrued expenses 4,631 5,020
---------- ----------
Total Current Liabilities 53,576 64,865
Long-term liabilities
Lease financing - long-term 642,306 645,549
Environmental remediation 11,188 11,240
Defined benefit plan obligation 19,166 18,781
Derivative valuation 57,042 -
Other liabilities 2,226 3,267
---------- ----------
Total Long-term Liabilities 731,928 678,837
---------- ----------
Total Liabilities 785,504 743,702
Commitments and Contingencies (Note 2) - -
PARTNERS' CAPITAL 388,559 441,458
---------- ----------
Total Liabilities and Partners' Capital $1,174,063 $1,185,160
========== ==========
The notes are an integral part of the condensed consolidated financial
statements.
4
Item 1. Condensed Consolidated Financial Statements (Unaudited)(Cont'd)
AES Eastern Energy, L.P.
Condensed Consolidated Statements of Cash Flows
Three months Three months
ended ended
March 31, 2001 March 31, 2000
-------------- --------------
(Thousands)
Operating Activities
Net income $35,455 $12,115
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 8,108 7,776
Interest income accrued in the rent reserve account (264) (350)
Transmission congestion contract revenue (6,896) -
Net cash payments from transmission contract 498 -
Gain on derivative valuation (69) -
Net deferred benefit plan cost 385 -
Changes in current assets and liabilities
Accounts receivable 3,408 3,406
Prepaid expenses (2,387) (2,485)
Inventory 616 6,911
Accounts payable 178 -
Accrued interest expense (13,106) -
Due to The AES Corporation 1,084 -
Accrued liabilities (1,839) (22,309)
Other liabilities (1,482) (364)
-------- --------
Net Cash Provided by Operating Activities 23,689 4,700
-------- --------
Investing Activities
Payments for capital additions (2,482) (1,770)
Decrease in restricted cash 12,220 (2,930)
-------- --------
Net Cash Provided by (Used in) Investing Activities 9,738 (4,700)
-------- --------
Financing Activities
Payments for Deferred financing (467) -
Principal payments on lease obligations (460) -
Dividends paid (32,500) -
-------- --------
Net Cash Used in Financing Activities (33,427) -
-------- --------
Net Change in Cash and Cash Equivalents - -
Cash and Cash Equivalents, Beginning of Period - -
-------- --------
Cash and Cash Equivalents, End of Period - -
======== ========
Supplemental Disclosures of Cash Flow Information:
Interest paid on financing leases $28,062 $36,396
========= ==========
The notes are an integral part of the condensed consolidated financial
statements.
5
Item 1. Condensed Consolidated Financial Statements (Unaudited) (Cont'd)
AES Eastern Energy, L.P.
Consolidated Statement of Changes in Partners' Capital
Three months ended March 31, 2001
(Thousands)
General Limited
Partner Partner Total
------- ------- --------
Balance, December 31, 2000 $4,414 $437,044 $441,458
Add net income for the period ended March 31, 2001 355 35,100 35,455
Distributions paid during 2001 (325) (32,175) (32,500)
Accumulated other comprehensive income (559) (55,295) (55,854)
------- -------- --------
Balance, March 31, 2001 $3,885 $384,674 $388,559
======= ========= =========
The notes are an integral part of the condensed consolidated financial
statements.
6
Item 1. Condensed Consolidated Financial Statements (Unaudited) (Cont'd)
Notes to the Condensed Consolidated Financial Statements
Note 1. Unaudited Condensed Consolidated Financial Statements
The accompanying unaudited condensed consolidated financial statements of
AES Eastern Energy, L.P. (the Partnership) reflect all adjustments which are
necessary, in the opinion of management, for a fair presentation of the
Partnership's consolidated results for the interim periods. All such adjustments
are of a normal recurring nature. The unaudited condensed consolidated financial
statements should be read in conjunction with the Partnership's consolidated
financial statements and notes contained therein, as of December 31, 2000 and
the period then ended, which are set forth in the Partnership's Annual Report on
Form 10-K for the year ended December 31, 2000.
Note 2. Commitments and Contingencies
Coal Purchases - In connection with the acquisition of the Partnership's four
coal-fired electric generating stations (the Plants), the Partnership assumed
from New York State Electric & Gas Corporation (NYSEG) an agreement to purchase
the coal required by the Somerset, Cayuga, and Westover Plants. Each year,
either party can request renegotiation of the price of one-third of the coal
supplied pursuant to this agreement. During 2000, the coal suppliers were
committed to sell and the Partnership was committed to purchase all three lots
of coal and either party could request renegotiation of one lot of coal for the
following year. The Partnership requested renegotiation during 2000 and reached
agreement on all three lots for 2001. Either party may request renegotiation
during 2001 but if the parties fail to reach agreement, then the parties would
have commitments with respect to only two lots in 2002. If the same thing
happened in 2002, the parties would have commitments with respect to only one
lot in 2003. The termination date for the contract is the end of 2003. No later
than June 30, 2003, the parties shall meet to determine if the agreement is to
be extended under mutually agreeable terms and conditions. If the agreement is
not extended, the Partnership would seek a new coal supplier. As of the
acquisition date of the Plants, the contract prices for the coal purchased
through 2002 were above the market price, and the Partnership recorded a
purchase accounting liability for approximately $15.7 million related to the
fulfillment of its obligation to purchase coal under this agreement. As of March
31, 2001, the remaining liability was approximately $6.3 million. The
Partnership has minimum coal purchase requirements for the years ending December
31, 2001, 2002, and 2003 in the amounts of $58.3 million, $60.3 million, and
$49.0 million, respectively. As of March 31, 2001, the remaining minimum coal
purchase requirement for the year ending December 31, 2001 was approximately
$45.8 million.
Transmission Agreements - On August 3, 1998, AES NY, LLC, the general partner of
the Partnership (the General Partner), entered into an agreement for the purpose
of transferring certain rights and obligations from NYSEG to the General Partner
under an existing transmission agreement among Niagara Mohawk Power Corporation
(NIMO), the New York Power Authority, NYSEG, and Rochester Gas & Electric
Corporation, and an existing transmission agreement between NYSEG and NIMO. This
agreement provides for the assignment of rights to transmit energy from the
Somerset Plant and other sources to remote load areas and other delivery points,
and was assumed by the Partnership on the date of acquisition of the Plants. In
accordance with its plan, as of the acquisition date, the Partnership
discontinued using this service. The Partnership did not transmit over these
lines but was required to pay the monthly fees until the effective cancellation
date, November 19, 1999. These fees aggregated approximately $3.4 million over
the six months ended December 31, 1999, and were recorded as a purchase
accounting liability. Because the Partnership did not use the lines during this
period, the Partnership received no economic benefit subsequent to the
acquisition.
The Partnership was informed by NIMO that the Partnership would be responsible
for the monthly fees of $500,640 under the existing transmission agreement to
the originally scheduled termination date of October 1, 2004. On October 5,
1999, the Partnership filed a complaint against NIMO alleging that the
Partnership has a right to non-firm transmission service upon six months prior
notice without payment of $500,640 in monthly fees subsequent to the
cancellation date of November 19, 1999.
7
On March 9, 2000, a settlement was reached between the Partnership and NIMO,
which was approved by the Federal Energy Regulatory Commission (FERC) on May 10,
2000. According to the settlement, the Partnership will continue to pay NIMO a
fixed rate of $500,640 per month during the period of November 20, 1999 to
October 1, 2004, and in turn, will receive a form of transmission service
commencing on May 1, 2000, which the Partnership believes will provide an
economic benefit over the period of May 1, 2000 to October 1, 2004. The
Partnership shall have the right under a Remote Load Wheeling Agreement (RLWA)
to transmit 298 MW over firm transmission lines from the Somerset Plant. The
Partnership shall have the right to designate alternate points of delivery on
NIMO's transmission system provided that the Partnership shall not be entitled
to receive any transmission service charge credit on the NIMO system. This final
settlement became effective November 1, 2000.
On November 1, 2000, the effective date of the final settlement, the
transmission contract was classified as an energy-trading contract as defined in
Emerging Issues Task Force No. 98-10, Accounting for Contracts Involved in
Energy Trading and Risk Management Activities. The transmission contract was
entered into because it provided a reasonable settlement for resolving a FERC
issue. The agreement is essentially a swap between the congestion component of
the locational prices posted daily by the New York ISO in western New York and
the more heavily populated areas in eastern New York. The agreement is a
speculative position since it is not an effective hedge, as defined under SFAS
No. 133, for the plant and because the Partnership believes that the value of
the rights received under the agreement exceed the payments that are required by
the agreement. The agreement is a financially settled contract since there is no
requirement to flow power under this agreement. The agreement generates gains or
losses from exposure to shifts or changes in market prices. The Partnership
recorded a gain of approximately $6.9 million in the first quarter of 2001
related to this contract (see Note 3).
Environmental - The Partnership has recorded a liability for environmental
remediation associated with the acquisition of the Plants. On an ongoing basis,
the Partnership monitors its compliance with environmental laws. Because of the
uncertainties associated with environmental compliance and remediation
activities, future costs of compliance or remediation could be higher or lower
than the amount currently accrued.
The Partnership received an information request letter dated October 12, 1999
from the New York Attorney General, which sought detailed operating and
maintenance history for the Westover and Greenidge Plants. On January 13, 2000,
the Partnership received a subpoena from New York State Department of
Environmental Conservation (DEC) seeking similar operating and maintenance
history from the Plants. The Partnership has provided materials responding to
the request from the Attorney General and the DEC. This information was sought
in connection with the Attorney General's and the DEC's investigations of
several electricity generating stations in New York that are suspected of
undertaking modifications in the past without undergoing an air permitting
review. The Partnership is unable to estimate the impact, if any, of these
investigations on its financial condition or results of future operations.
On April 14, 2000, the Partnership received a request for information pursuant
to Section 114 of the Clean Air Act from the U.S. Environmental Protection
Agency (EPA) seeking detailed operating and maintenance history data for the
Cayuga and Somerset Plants. The EPA has commenced an industry-wide investigation
of coal-fired electric power generators to determine compliance with
environmental requirements under the Clean Air Act associated with repairs,
maintenance, modifications and operational changes made to coal-fired facilities
over the years. The EPA's focus is on whether the changes were subject to new
source review or new source performance standards, and whether best available
control technology was or should have been used. The Partnership has provided
the requested documentation and the EPA is currently evaluating the materials.
The Partnership is unable to estimate the impact, if any, of this investigation
on its financial condition or results of future operations.
By letter dated May 25, 2000, the DEC issued a Notice of Violation (NOV) to
NYSEG for violations of the Clean Air Act and the Environmental Conservation Law
at the Greenidge and Westover Plants related to NYSEG's alleged failure to
obtain an air permitting review for repairs and improvements made during the
1980s and 1990s, which was prior to the acquisition of the Plants by the
Partnership. Pursuant to the purchase agreement relating to the acquisition of
the Plants from NYSEG, the Partnership agreed to assume responsibility for
environmental liabilities that arose while NYSEG owned the Plants. On September
12, 2000, the Partnership agreed with NYSEG that the Partnership will assume the
defense of and responsibility for the NOV, subject to a reservation of its right
to assert applicable exceptions to its contractual undertaking to assume
preexisting environmental liabilities. The financial and operational effect of
this NOV is still being discussed with the DEC.
8
The Partnership is unable to estimate the effect of this NOV on its financial
condition or results of future operations. It is possible that the DEC NOV and
other potential enforcement actions arising out of the Attorney General, DEC,
and EPA investigations may result in penalties and the potential requirement to
install additional air pollution control equipment and could require the
Partnership to make substantial expenditures.
Nitrogen Oxide and Sulfur Dioxide Emission Allowances - The Plants emit nitrogen
oxide (NOX) and sulfur dioxide (SO2) as a result of burning coal to produce
electricity. The Plants have been allocated allowances by the DEC to emit NOX
during the ozone season, which runs from May 1 to September 30. Each NOX
allowance authorizes the emission of one ton of NOX during the ozone season. The
Plants are also subject to SO2 emission allowance requirements imposed by the
EPA. Each SO2 allowance authorizes the emission of one ton of SO2 during the
calendar year. All of the Plants are currently subject to SO2 allowance
requirements, and are required to hold sufficient allowances to emit SO2. Both
NOX and SO2 allowances may be bought, sold, or traded. If NOX and/or SO2
emissions exceed the allowance amounts allocated to the Plants, then the
Partnership may need to purchase additional allowances on the open market or
otherwise reduce its production of electricity to stay within the allocated
amounts. The Plants were net sellers of NOX allowances in 2000 and are also
expected to have a surplus of NOX allowances in 2001. The Plants were self
sufficient with respect to SO2 allowances in 2000, however it is expected that
the Plants may have a shortfall of approximately 10,000 to 13,000 SO2 allowances
in 2001 assuming the units are operated at capacities similar to 2000. At
current market prices, it may cost upwards of $1.75 million to $2.275 million to
purchase sufficient SO2 allowances for 2001.
Note 3. New Accounting Pronouncements
On January 1, 2001, the Partnership adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, which, as amended, established
new accounting and reporting standards for derivative instruments and hedging
activities. The adoption of SFAS No. 133 on January 1, 2001, resulted in a
cumulative reduction of Other Comprehensive Income (OCI) in Partner's Capital of
$66.3 million.
The Partnership utilizes derivative financial instruments to hedge commodity
price risk. The Partnership utilizes electric derivative instruments, including
swaps and forwards, to hedge the risk related to forecasted electricity sales
over the next four years. The majority of the Partnership's electric derivatives
are designated and qualify as cash flow hedges. No hedges were derecognized or
discontinued during the three months ended March 31, 2001. No significant
amounts of hedge ineffectiveness were recognized in earnings during the three
months ended March 31, 2001.
Gains and losses on derivatives reported in accumulated other comprehensive
income are reclassified into earnings when the hedged forecasted sale occurs.
Approximately, $25.4 million of other comprehensive income is expected to be
recognized as a reduction to earnings over the next twelve months. Amounts
recorded in other comprehensive income during the three months ended March 31,
2001, were as follows (in millions):
Transition adjustment on January 1, 2001 $66.3
Reclassified to earnings (5.6)
Change in fair value (4.8)
Balance, March 31, 2001 $55.9
-----
Note 4. Subsequent Event
In April 2001, the Partnership entered into a $35 million secured revolving
working capital and letter of credit facility with Union Bank of California,
N.A. This facility has a term of approximately twenty-one months. The
Partnership can borrow up to $35 million for working capital purposes under this
facility. In addition, the Partnership can have letters of credit issued under
this facility up to $25 million, provided that the total amount of working
capital borrowings and letters of credit issuances may not exceed the $35
million limit on the entire facility.
Note 5. Reclassifications
Certain 2000 amounts have been reclassified on the condensed consolidated
financial statements to conform with the 2001 presentation.
9
Item 1. Condensed Consolidated Financial Statements (Unaudited) (Cont'd)
AES NY, L.L.C.
Condensed Consolidated Balance Sheets
March 31,2001 Dec. 31, 2000
------------- -------------
(Thousands)
ASSETS
Current Assets
Restricted cash:
Operating - cash and cash equivalents $ 6,055 $12,207
Revenue account 67,100 73,141
Accounts receivable - trade 31,091 34,976
Accounts receivable - affiliates 3,953 2,651
Accounts receivable - other 1,608 2,430
Inventory 24,040 25,151
Prepaid expenses 8,726 6,244
---------- ----------
Total Current Assets 142,573 156,800
Property, Plant, Equipment and Related Assets
Land 7,334 7,327
Electric generation assets(net of accumulated
depreciation of $46,275 and $39,390) 738,755 743,029
Other intangible assets (net of accumulated
amortization of $13,891 and $12,273) 231,542 232,480
---------- ----------
Total property, plant, equipment
and related assets 977,631 982,836
Other Assets
Derivative valuation asset 1,258 -
Transmission congestion contract 31,249 24,851
Rent reserve account 31,242 30,978
---------- ----------
Total Assets $1,183,953 $1,195,465
========== ==========
LIABILITIES AND MEMBER'S EQUITY
Current Liabilities
Accounts payable $1,624 $1,457
Lease financing - current 4,596 1,813
Enviromental remediation 2,000 2,000
Accrued interest expense 16,366 29,472
Due to The AES Corporation 9,861 8,746
Other accrued expenses 16,071 18,912
Other liabilities 4,633 5,020
---------- ----------
Total Current Liabilities 55,151 67,420
Long-term liabilities
Derivative valuation liability 57,042 -
Lease financing - long-term 642,306 645,549
Environmental remediation 12,715 12,801
Defined benefit plan obligation 18,979 18,592
Other liabilities 2,226 3,267
---------- ----------
Total Long-term Liabilities 733,268 680,209
---------- ----------
Total Liabilities 788,419 747,629
Commitments and Contingencies (Note 3) - -
Minority Interest 446,874 443,358
Member's Equity 4,514 4,478
Accumulated other comprehensive income (55,854) -
----------- ----------
Total Liabilities and Member's Equity $1,183,953 $1,195,465
=========== ===========
The notes are an integral part of the condensed consolidated financial
statements.
10
Item 1. Condensed Consolidated Financial Statements (Unaudited) (Cont'd)
Note 1. Condensed Consolidated Balance Sheets
The accompanying unaudited condensed consolidated balance sheets of AES NY,
L.L.C. (the Company) reflect all adjustments which are necessary, in the opinion
of management, for a fair presentation of the Company's consolidated results for
the interim periods. All such adjustments are of a normal recurring nature. The
unaudited condensed consolidated balance sheets should be read in conjunction
with the Company's consolidated balance sheet and notes contained therein, as of
December 31, 2000 which are set forth in the Annual Report on Form 10-K of AES
Eastern Energy, L.P.(AEE)for the year ended December 31, 2000.
Note 2. Plants Placed on Long-Term Cold Standby
During the fourth quarter of 2000, AES Creative Resources, L.P. (ACR) placed its
AES Hickling and AES Jennison plants (ACR Plants) on long-term cold standby. The
long-term cold standby designation means that these plants require more than 14
days to be brought on-line. The Company is currently evaluating the future of
these plants.
Note 3. Commitments and Contingencies
Coal Purchases - In connection with the acquisition by AEE of its four
coal-fired electric generating stations (the AEE Plants), AEE assumed from New
York State Electric & Gas Corporation (NYSEG) an agreement to purchase the coal
required by the AEE Somerset, Cayuga, and Westover plants. Each year, either
party can request renegotiation of the price of one-third of the coal supplied
pursuant to this agreement. During 2000, the coal suppliers were committed to
sell and AEE was committed to purchase all three lots of coal and either party
could request renegotiation of one lot of coal for the following year. AEE
requested renegotiation during 2000 and reached agreement on all three lots for
2001. Either party may request renegotiation during 2001 but if the parties fail
to reach agreement, then the parties would have commitments with respect to only
two lots in 2002. If the same thing happened in 2002, the parties would have
commitments with respect to only one lot in 2003. The termination date for the
contract is the end of 2003. No later than June 30, 2003, the parties shall meet
to determine if the agreement is to be extended under mutually agreeable terms
and conditions. If the agreement is not extended, AEE would seek a new coal
supplier. As of the acquisition date, the contract prices for the coal purchased
through 2002 were above the market price, and AEE recorded a purchase accounting
liability for approximately $15.7 million related to the fulfillment of its
obligation to purchase coal under this agreement. As of March 31, 2001, the
remaining liability was approximately $6.3 million. AEE has minimum coal
purchase requirements for the years ending 2001, 2002, and 2003 in the amounts
of $58.3 million, $60.3 million, and $49.0 million, respectively. As of March
31, 2001, the remaining AEE minimum coal purchase requirement for the year
ending December 31, 2001, was approximately $45.8 million. ACR had no minimum
coal purchase requirements as of March 31, 2001.
Transmission Agreements - On August 3, 1998, the Company entered into an
agreement for the purpose of transferring certain rights and obligations from
NYSEG to the Company under an existing transmission agreement among Niagara
Mohawk Power Corporation (NIMO), the New York Power Authority, NYSEG, and
Rochester Gas & Electric Corporation, and an existing transmission agreement
between NYSEG and NIMO. This agreement provides for the assignment of rights to
transmit energy from the Somerset Plant and other sources to remote load areas
and other delivery points, and was assumed by AEE on the date of acquisition of
the Plants. In accordance with its plan, as of the acquisition date, AEE
discontinued using this service. AEE did not transmit over these lines but was
required to pay the monthly fees until the effective cancellation date, November
19, 1999. These fees aggregated approximately $3.4 million over the six months
ended December 31, 1999, and were recorded as a purchase accounting liability.
Because AEE did not use the lines during this period, AEE received no economic
benefit subsequent to the acquisition.
AEE was informed by NIMO that AEE would be responsible for the monthly fees of
$500,640 under the existing transmission agreement to the originally scheduled
termination date of October 1, 2004. On October 5, 1999, AEE filed a complaint
against NIMO alleging that AEE has a right to non-firm transmission service upon
six months prior notice without payment of $500,640 in monthly fees subsequent
to the cancellation date of November 19, 1999. On March 9, 2000, a settlement
was reached between AEE and NIMO, which was approved by the Federal Energy
Regulatory Commission (FERC) on May 10, 2000. According to the settlement, AEE
will continue to pay NIMO a fixed rate of $500,640 per month during the period
of November 20, 1999, to October 1, 2004 and in turn, will receive a form of
transmission service commencing on May 1, 2000, which AEE believes will provide
an economic benefit over the period of May 1, 2000 to October 1, 2004. AEE shall
have the right under a Remote Load Wheeling Agreement (RLWA) to transmit 298 MW
over firm transmission lines from the Somerset Plant. AEE shall have the right
to designate alternate points of delivery on NIMO's transmission system provided
that AEE shall not be entitled to receive any transmission service charge credit
on the NIMO system. This final settlement became effective November 1, 2000.
11
On November 1, 2000, the effective date of the final settlement, the
transmission contract was classified as an energy-trading contract as defined in
Emerging Issues Task Force No. 98-10, Accounting for Contracts Involved in
Energy Trading and Risk Management Activities. The transmission contract was
entered into because it provided a reasonable settlement for resolving a FERC
issue. The agreement is essentially a swap between the congestion component of
the locational prices posted daily by the New York ISO in western New York and
the more heavily populated areas in eastern New York. The agreement is a
speculative position since it is not an effective hedge, as defined in SFAS No.
133, for the plant and because AEE believes that the value of the rights
received under the agreement exceed the payments that are required by the
agreement. The agreement is a financially settled contract since there is no
requirement to flow power under this agreement. The agreement generates gains or
losses from exposure to shifts or changes in market prices. AEE recorded a gain
of approximately $6.9 million in the first quarter of 2001 related to this
contract.
Environmental - The Company has recorded a liability for environmental
remediation associated with the acquisition of the AEE Plants and the ACR Plants
(see Note 3). On an ongoing basis, the Company monitors its compliance with
environmental laws. Because of the uncertainties associated with environmental
compliance and remediation activities, future costs of compliance or remediation
could be higher or lower than the amount currently accrued.
AEE received an information request letter dated October 12, 1999 from the New
York Attorney General, which sought detailed operating and maintenance history
for the Westover and Greenidge Plants. On January 13, 2000, the Company received
a subpoena from the New York State Department of Environmental Conservation
(DEC) seeking similar operating and maintenance history from the AEE and ACR
Plants. The Company has provided materials responding to the requests from the
Attorney General and the DEC. This information was sought in connection with the
Attorney General's and the DEC's investigations of several electricity
generating stations in New York that are suspected of undertaking modifications
in the past without undergoing an air permitting review. The Company is unable
to estimate the impact, if any, of these investigations on its financial
condition or results of operations.
On April 14, 2000 AEE received a request for information pursuant to Section 114
of the Clean Air Act from the U.S. Environmental Protection Agency (EPA) seeking
detailed operating and maintenance history data for the Cayuga and Somerset
Plants.
Nitrogen Oxide and Sulfur Dioxide Emission Allowances - AEE Plants and the ACR
Plants emit nitrogen oxide (NOX) and sulfur dioxide (SO2) as a result of burning
coal to produce electricity. The six Plants have been allocated allowances by
the DEC to emit NOX during the ozone season, which runs from May 1 to September
30. Each NOX allowance authorizes the emission of one ton of NOX during the
ozone season. The six Plants are also subject to SO2 emission allowance
requirements imposed by the EPA. Each SO2 allowance authorizes the emission of
one ton of SO2 during the calendar year. All of the Plants are currently subject
to SO2 allowance requirements, and are required to hold sufficient allowances to
emit SO2.
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Both NOX and SO2 allowances may be bought, sold, or traded. If NOX and/or SO2
emissions exceed the allowance amounts allocated to the six Plants, then the
Company may need to purchase additional allowances on the open market or
otherwise reduce its production of electricity to stay within the allocated
amounts. The Plants were net sellers of NOX allowances in 2000 and are also
expected to have a surplus of NOX allowances in 2001. The Plants were self
sufficient with respect to SO2 allowances in 2000, however it is expected that
the Plants may have a shortfall of approximately 10,000 to 13,000 SO2 allowances
in 2001 assuming the units are operated at capacities similar to 2000. At
current market prices, it may cost upwards of $1.75 million to $2.275 million to
purchase sufficient SO2 allowances for 2001.
In October 1999, ACR entered into a consent order with the DEC to resolve
alleged violations of the water quality standards in the groundwater
downgradient of an ash disposal site. The consent order included a suspended
$5,000 civil penalty and a requirement to submit a work plan to initiate closure
of the landfill by October 8, 2000. The consent order also called for a site
investigation, which was carried out and indicated that there is a possibility
that some groundwater remediation at the site may be required. Further
compliance with this order included a Closure Investigation Report which was
submitted to the DEC in the spring of 2000, and a Closure Plan which was
submitted to the Department of Environmental Conservation in January 2001. The
latest part of the consent order will be implemented during the 2001
spring/summer construction season when the work scope for covering the site and
carrying out the future monitoring of the site per the Closure Plan will be
implemented. AEE2, L.L.C., a subsidiary of AEE will contribute two-thirds of the
costs to close the landfill, which are anticipated to be approximately $3
million as additional costs for long term groundwater monitoring. While the
actual closure costs may exceed the $3 million, which is included in the
environmental remediation liability, management does not expect any added
closure costs to be material.
Note 4. New Accounting Pronouncements
On January 1, 2001, the Company adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which, as amended, established new
accounting and reporting standards for derivative instruments and hedging
activities. The adoption of SFAS No. 133 on January 1, 2001, resulted in a
cumulative reduction of Other Comprehensive Income(OCI) in member's equity of
$66.3 million.
AEE utilizes derivative financial instruments to hedge commodity price risk. AEE
utilizes electric derivative instruments, including swaps and forwards, to hedge
the risk related to forecasted electricity sales over the next four years. The
majority of AEE's electric derivatives are designated and qualify as cash flow
hedges. No hedges were derecognized or discontinued during the three months
ended March 31, 2001. No significant amounts of hedge ineffectiveness were
recognized in earnings during the three months ended March 31, 2001.
Gains and losses on derivatives reported in accumulated other comprehensive
income are reclassified into earnings when the hedged forecasted sale occurs.
Approximately, $25.4 million of other comprehensive income is expected to be
recognized as a reduction to earnings over the next twelve months. Amounts
recorded in other comprehensive income during the three months ended March 31,
2001, were as follows (in millions):
Transition adjustment on January 1, 2001 $66.3
Reclassified to earnings (5.6)
Change in fair value (4.8)
Balance, March 31, 2001 $55.9
-----
Note 5. Subsequent Event
In April 2001, AEE entered into a $35 million secured revolving working capital
and letter of credit facility with Union Bank of California, N.A. This facility
has a term of approximately twenty-one months. AEE can borrow up to $35 million
for working capital purposes under this facility. In addition, AEE can have
letters of credit issued under this facility up to $25 million, provided that
the total amount of working capital borrowings and letters of credit issuances
may not exceed the $35 million limit on the entire facility.
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Item 2. Discussion and analysis of results of operations and financial condition
Results of Operations
- ----------------------
Energy Revenues for the three months ended March 31, 2001, were $94.1 million,
compared to $72.1 million for the comparable period of the prior calendar year,
an increase of 30.5%. The increase in Energy Revenues is primarily due to higher
market prices and higher operating levels. Capacity Revenues for the three
months ended March 31, 2001, were $7.7 million, compared to $7.8 million for the
comparable period of the prior calendar year, a decrease of 1.3%. Transmission
Congestion Contract Revenues for the three months ended March 31, 2001 were $6.9
million. This agreement is essentially a swap between the congestion component
of the locational prices posted by the New York ISO in western New York and the
more populated areas in eastern New York. The Transmission contract was entered
into because it provided a reasonable settlement for resolving a FERC dispute
between the Partnership and Niagara Mohawk Power Corporation.
Operating Expenses for the three months ended March 31, 2001, were $62.0
million, compared to $52.9 million for the comparable period of the prior
calendar year, an increase of 17.2%. The increase in Operating Expenses is
primarily due to higher operating levels, which necessitated greater coal usage,
greater coal purchases on the spot market and higher operating and maintenance
expenditures.
Other Income/Expenses for the three months ended March 31, 2001, were $13.9
million, compared to $15.1 million for the comparable period of the prior
calendar year, a decrease of 7.9%. The decrease in Other Income/Expense is
primarily due to a one time additional interest charge in the first quarter of
2000.
Liquidity and Capital Resources
- --------------------------------
Net working capital at March 31, 2001 and December 31, 2000 was $81.6 million
and $84.2 million, respectively.
Cash flow from our operations during the second half of 2000 was sufficient to
cover the aggregate rental payments under the leases on the Somerset Generating
Station and the Cayuga Generating Station due January 2, 2001. We believe that
cash flow from our operations will be sufficient to cover aggregate rental
payments on each rent payment date thereafter.
We are obligated to make payments under the Coal Hauling Agreement with Somerset
Railroad Corporation (SRC), an affiliated company, in an amount sufficient, when
added with funds available from other sources, to enable SRC to pay, when due,
all of its operating expenses and other expenses, including interest on and
principal of outstanding indebtedness. As of March 31, 2001 and 2000, we had
recorded $1.3 million and $750 thousand, respectively, as operating expenses and
other accrued liabilities under this agreement. On August 14, 2000, SRC entered
into a $26 million credit facility with Fortis Capital Corp. which replaced in
its entirety a credit facility for the same amount previously provided to SRCad
by an affiliate of CIBC World Markets. The new credit facility provided by
Fortis Capital Corp. consists of a 14-year term note (maturing on May 6, 2014),
with principal and interest payments due quarterly. The principal amount of
SRC's outstanding indebtedness under this credit facility was approximately $25
million as of March 31, 2001.
At March 9, 2001, the Credit Suisse First Boston working capital credit facility
was terminated. In April 2001, we entered into a $35 million secured revolving
working capital and letter of credit facility with Union Bank of California,
N.A. This facility has a term of approximately twenty-one months. We can borrow
up to $35 million for working capital purposes under this facility. In addition,
we can have letters of credit issued under this facility up to $25 million,
provided that the total amount of working capital borrowings and letters of
credit issuances may not exceed the $35 million limit on the entire facility.
14
Investing Activities
During the first quarter of 2001, we incurred approximately $2.5 million in
capital expenditures. These expenditures were primarily for the installation of
a selective catalytic reduction system at the Cayuga Generating Station and
other necessary expenditures under our life extension program. We have budgeted
capital expenditures to be $18.2 million in 2001, $10.4 million in 2002, $4.4
million in 2003, $3.5 million for 2004 and a total of $335 million for the
remaining years through 2032. These amounts include approximately $11.2 million
to install a selective catalytic reduction system to reduce NOX emissions at the
Cayuga Generating Station during a scheduled outage in 2001. In addition to
capital requirements associated with the ownership and operation of our
electricity generating stations, we will have significant fixed charge
obligations in the future, principally with respect to the leases.
On January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which as amended, established new
accounting and reporting standards for derivative instruments and hedging
activities. As of March 31, 2001, we have recorded $1 million of derivative
assets in other assets and $57 million of derivative liabilities in other
liabilities. Although most of the our financial instruments qualify for hedge
accounting which permits changes in the value of the financial instruments to
offset the related changes in the hedged item, the adoption of SFAS No. 133 will
result in more variation to our results of operations. SFAS No. 133 did not have
a significant impact on our results of operations for the three months ended
March 31, 2001.
Financing Activities
The pass through trust certificates accrued additional interest at a rate of
0.50% per annum from November 10, 1999 until March 27, 2000, when we completed
an exchange offer for the pass through trust certificates. The additional
interest accrued as a result of our failure to complete the exchange offer on or
prior to November 10, 1999. This additional interest was approximately $1
million with the amount due through December 31, 1999 being paid in April 2000.
The remaining additional interest was paid on the scheduled rent payment date,
July 3, 2000.
Cash flow from operations in excess of the aggregate rental payments under our
leases is permitted, if certain criteria are met, to be paid in the form of a
dividend to AES NY, LLC. On January 11, 2001, we made a dividend payment of
$32.5 million.
Foward-looking Statements
Certain statements contained in this Form 10-Q are forward-looking
statements as that term is defined in the Private Securities Litigation Reform
Act of 1995. These forward-looking statements speak only as of the date hereof.
Forward-looking statements can be identified by the use of forward-looking
terminology such as "believe," "expects," "may," "intends," "will," "should" or
"anticipates" or the negative forms or other variations of these terms or
comparable terminology, or by discussions of strategy. Future results covered by
the forward-looking statements may not be achieved. Forward-looking statements
are subject to risks, uncertainties and other factors, which could cause actual
results to differ materially from future results expressed or implied by such
forward-looking statements. The most significant risks, uncertainties and other
factors are discussed under the heading "Business (a)General Development of
Business" in our Annual Report on Form 10-K, and you are urged to read this
section and carefully consider such factors.
15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 3 to our Condensed Consolidated Financial Statements in Part I.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
None
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Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AES EASTERN ENERGY, L.P.
By: AES NY, L.L.C., as General Partner
By:/s/ Daniel J. Rothaupt
--------------------------------
Daniel J. Rothaupt
President
By:/s/ Michael Romaniw
---------------------------------
Michael Romaniw
Vice President
(principal financial officer)
Date: May 17, 2001
17